1. Calorie Cow Catering is looking to expand its bakery options. They currently expect earnings of $0.68 per share this upcoming year. Their opportunity cost of capital (think discount rate or i) is 14.5%. They plan on pursuing two pastry projects in the upcoming years. The first new pastry is the Cattle Rancher Cronut. This will require an initial investment of all available earnings next year. Once it is on the market, it is projected to return $0.90 per dollar invested. This will grow by 35% for 2 years. Then its earnings are projected to decline by 75% a year forever. The second product is a new line of mini cupcakes called Bovine Bites. It will require the investment of all earnings for 2 years. It will provide a return of $1.40 per share the first year. This will grow by 60% for 2 years before reaching a steady growth of 5% forever.

(a) Before beginning any PV calculations, draw the timeline for the projected costs and earnings of the two projects. Include 7 years in the timeline for each project. (Consider the following hints as you are drawing the timelines. Since the first project requires the in- vestment of all earnings, you will have to wait to invest in the second project. Also, when calculating the potential earnings you can invest in the second project, be sure to include earnings from the first project in addition to the original EPS - we assume that won't change as the firm will continue its previous operation.). Please calculate everything on a per share basis.

(b) What is the PV generated by the first project through the end of year 4 (periods 0-4 on your timeline)?

(c) What is the PV of the remaining earnings of the first project, periods 5 and beyond? (hint: use the appropriate annuity or perpetuity formula and then discount it the appropriate number of years).